Your weekly economic update from the team at FXD Capital
Over the past year, the pound has been one of the best-performing currencies in the world. In February, GBPUSD climbed to over 1.42, reaching levels not seen since 2018. While it pales in the context of historical levels (remember back in 2007 when it was trading above 2.00?), sterling has been showing growing recovery momentum from its 2016 Brexit re-rating.
Since February, sterling has fallen off by 3% and 2.5% against its respective highs versus USD and EUR. The pullback’s reasons appear to be purely related to sentiment, as nothing particularly untoward has impacted the economy during the time. There has been constant news about growth, economic activity and productivity improvements, which, generally speaking, further stoke claims about potential rate rises, which would channel through to the increased relative value of sterling.
The sentiment going against sterling is more related to the relative improvements of other currencies. While the Eurozone is further back in its vaccine push, the doomsday scenarios envisaged earlier in the year are not coming to pass. Investors’ herd mentality is driving sentiment towards extreme scenarios, which eventually fizzle out as normalcy resumes. We have seen this play out in the US over recent months with attitudes towards inflation.
The characteristics that will define Sterling’s performance in the mid-term will not be down to rates and macroeconomic performance, but more the conditions that the UK presents for trade, investment and the subsequent investment inflows. As the aftermath of Brexit manifests through export/import data, corporation tax increases, and government initiatives, we will see whether the country emerges as an attractive proposition for foreign capital investment, and that will be the defining factor of whether GBPUSD rises back towards its post-2008 “norm” of 1.60.
ONS data shows that labour productivity rose during the pandemic, with average output per hour rising 0.4% on the year. The general thesis behind the data is that less productive businesses were forced shut through lockdown measures. The optimism for planners is that the growth was in contrast to the falling productivity experienced through the global financial crisis.
Perhaps as a sign of the growing divergence between some groups’ economic fortunes, overall productivity fell over the year by 9.5%. So, essentially we are less productive overall, but those who are working are more so. The past year’s ramifications on future work, living, and social patterns will become more apparent over the next several years. The adoption (and validation from these numbers) of remote working may prove to be the kind of fortuitous catalyst that finally helps planners address the economic imbalances between London and the rest of the country.
In terms of data, news about job hiring this week gave further confidence towards the economic recovery. Since last March, job vacancies are at their highest level, with hospitality and retail vacancies rising in anticipation of their April 12 re-opening. Furlough data showed a 1% fall in the two weeks to April 4, with the total now constituting 17% of the private sector workforce. Unemployment currently sits at approximately 5%.
Retail spending for March beat expectations, rising by the second-highest margin ever on the month. The 9.8% increase topped the headline prediction of 5.9%. Bad weather hampered February’s performance, but the overall figure bounced back once the $1.9 trillion stimulus plan launched in March. With retail spending consisting two-thirds of American economic output, its rampant performance fans the flames of the accelerated recovery and potential inflation consequences at play in America.
Global stocks hit record highs after the release of the upbeat US data, and markets are now seemingly well past the jitters experienced a month ago.
Earlier in the year, when US treasuries were selling off, the gap between treasury yields and various European government benchmarks widened. Dampened enthusiasm for a European recovery meant inflation expectations weren’t as high and investors were staying put. This gap is now starting to narrow as Europe begins to turn the corner. 10-year UST-Bund spreads topped 2.0% last month and has since pulled back to closer to 1.8. The Euro has also started regaining ground on its first-quarter 4% loss against the dollar.
While no magic bullet has materialised for Europe to overcome its slow vaccine rollout, the fact that it is progressing shows how investors are quick to jump on a new narrative and ride whatever momentum they can find in the global recovery trade. With solid recovery for the UK and US now seemingly priced in, sentiment is rushing to Europe. In a month or so, when this is all priced in again, it will be interesting to see which regions enter the crosshairs next. Specific emerging markets regions would appear the logical choice.
All the best for the week ahead,
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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